REIA shows whites of the eyes as negative gearing faces chop

From the REIA:

REIA responds to oppositions start date for negative gearing and capital gains tax changes 

The Real Estate Institute of Australia (REIA) has reiterated its strong opposition to the Labor Party’s negative gearing and capital gains tax policy following the announcment that the 1 January 2020 would be the start date for their negative gearing and capital gains tax increases if they were to win the Federal election.

“The REIA has always been concerned with the impact the policy would have on housing markets, buyers, renters and economic activity,” REIA President Adrian Kelly said.

“This concern is magnified in the current market.
“There is almost truck loads of analysis and reports showing the adverse impacts of the policy on mum and dad investors, home owners, renters, the construction industry, state governments and the economy.

“The latest was last week when SQM Research showed that:  house prices would drop between 5% to 12% on a weighted average for the capital cities for 2020 to 2022 over and above any other falls being experienced; rents are expected to increase by between 8% and 15% on a weighted average for the capital cities for 2020 to 2022; housing construction activity will fall by 25% to 30% from 2019 levels, which; will have employment and GDP impacts; property sales turnover is forecast to fall by a further 12% to 15%, resulting in; a drop in state stamp duty revenue of approximately $2.3 billion.

“For first home buyers, who according to Labor, should see improved housing affordability by a “levelling of the playing field” will now face a faltering economy, lower employment prospects, the possibility of higher interest rates under a Labor Government* and higher rents whilst they save for a deposit,” Mr Kelly said.

I only posted this so readers can enjoy the whites of the eyes at the nation’s greatest property locust. The REIA’s desperation is obvious in the furious pumping of the debunked SQM research. Let’s not forget that SQM itself was very much in favour of the reforms before a conversion on the road to Damascus.

On 11 March 2015 SQM noted the following with regards to the Abbott Government’s refusal to reform the tax lurk:

“We are of the belief that the less government intervention there is in the property market, the better. Governments all round should be doing more to promote housing affordability, not unaffordability.

Reducing negative gearing, a highly distortionary policy, would have a far more beneficial effect on promoting housing affordability. If negative gearing was repealed or altered, investors who are now gobbling up property would back off buying houses, which is what those who are demanding lower dwelling prices want to see…

So, if anything needs to be done, it is to eliminate existing distortions, and not introduce more”.

SQM then followed-up on 30 March 2015 with a strongly worded piece arguing that negative gearing should be restricted to new dwellings in order to boost dwelling supply:

“I firmly believe negative gearing should be restricted to new residential real estate. By allowing negative gearing on new residential properties and off-the-plan developments, we are providing a proper tax benefit to where it is justified and needed most: the construction and development of new dwellings.

That was the original purpose of negative gearing. The tax benefit was actually first introduced in 1936 with the direct aim to increase the supply of housing and move the economy forward from the Great Depression.

The problem is when it is applied on existing properties there is no real tangible economic benefit. Instead, it is unnecessarily stimulating demand on existing housing and, therefore, pushing house prices artificially upwards and so, damaging affordability.

Now in all this, if negative gearing is restricted, it will unlikely mean dwelling price falls everywhere. The market is driven by many factors including population growth, interest rates, the exchange rate and, of course, the health of the economy. However, I would expect a moderate correction, where investor demand has been very strong in recent times, such as the Sydney housing market…

If governments wish to improve affordability in the market, restricting negative gearing to new homes would be ideal. It would stimulate new housing and reduce investor activity on existing housing”.

Then On 17 April 2015, SQM continued:

Louis Christopher this morning told SmartCompany he was disappointed in the Prime Minister’s “hypocritical” decision to leave negative gearing unchanged.

“Now would have been a perfect time to implement changes, given the market is on a little high, it would have been able to withstand any changes now, rather than in a period of downturn,” says Christopher.

Christopher says given the backdrop of the budget black hole and a housing affordability crisis, a reform would have been a “vote winner” for the Abbott government.

“Tony Abbott now has hardly any leg to stand on when talking about tax reform and tightening our belts and so forth,” he says.

“The changes will fall on the working class, when he’s willing to give breaks on big companies and breaks on investors, it’s hypocritical. This will be a vote loser”…

Christopher also says the decision seems to go against the direction of Abbott’s own Treasurer, Joe Hockey, and believes the PM is listening to “self-serving” voices and not looking at the bigger picture.

“It’s stupid from a property market perspective. He’s failed.”

In February, 2016 SQM appeared on Sunrise to argue the case:

Here’s the money quote:

“The notion of having negative gearing on new property is not a bad idea because I think that will encourage supply and puts the concession where we need it most, and that is increasing the supply of new real estate, which will keep the rents at a stable level and make sure that we don’t have a long-term housing bubble”.

A few days later, SQM appeared on The ABC arguing that Labor’s policy would most likely lower rents:

DAVID TAYLOR: [Christopher] says there’s no clear evidence that the Labor government’s policy to scrap negative gearing in the 1980s led to higher rental prices.

LOUIS CHRISTOPHER: The truth is that the rental period at that time, across Australia, was mixed.

There were some cities during this time which recorded falls in rents; there were other cities, namely Perth and Sydney, which were recording rises in rents above and beyond inflation.

DAVID TAYLOR: Louis Christopher, based on your numbers though, do you suspect that rents would rise if negative gearing was taken away, as property investors try to make up for some of the other expenses?

LOUIS CHRISTOPHER: What Labor has actually put forward is about stimulating new supply of property, so we think that that would put a little bit of a dent in that whole argument that “look, rents would dramatically rise”, because what they’re trying to do here is actually stimulate the supply side, and we think they would have some success in doing that.

And later in February SQM argued that there would be no rent spikes or market decimation under Labor’s policy:

“Would there be a surge in rents?

In our opinion, we think no. And that is based on what happened in history as well as the fact that if Labor’s policy passed, it would keep negative gearing on new property…

Labors’ proposal to keep negative gearing on new properties would most likely ensure a strong supply side response to the market. We have seen such directed stimulus work on the markets before, namely in the form of various first home owner grants, so we are confident, the market is responsive to such stimulus.

We believe that should Labor’s proposal succeed there would be an adjustment period where, yes, many investors may stay away from existing property for a period of time, but only until such time that a rise in yields gives them incentive to start buying existing properties again. This would happen as investors would demand a higher yield to offset the lack of tax concessions.

But such a period would not go on forever. Once yields are higher, investors would then re-enter the market. Potentially yields could rise to the point where existing residential properties are cash-flow positive from day one, or at least, cash flow neutral. Which I believe would be a positive for the asset class over the long run…

But this adjustment does not necessarily mean there would be an outright “decimation of the market”. We may well likely see for example a period of stagnation in property prices for existing property. Or prices rising more slowly than rents”.

Then in March 2016, SQM slammed the dodgy BIS modelling’s claim that rents would rise by 10% under Labor’s policy:

SQM Research managing director Louis Christopher also called the report’s findings, in particular a rent increase of 10 per cent, “hard to believe”.

“We think the opposite would play out – there would be a moderate increase in supply,” Mr Christopher said.

“Negative gearing is an existing distortion and the market will eventually adjust to the new reality,” he said.

Prices are falling today versus rising through 2015/16 but the arguments don’t change. The tax changes are structural not cyclical. Property is still miles overvalued. Rental markets are not about to take off, if anything loosening. And supply still needs to keep coming if population growth continues.

Comments

  1. I’d be really curious to find out what has caused the SQM flip-flop.

    Death threats or a genuine re-evaluation? In any event there does not need to be any Govt incentives to make the industry build stuff — that is sheer lunacy. What are 10% of the entire workforce going to do — sit on their hands and sulk until they get their way?

    The free market is perfectly capable of locating a clearing price for property of all shapes and sizes without Govt assistance. It’s not rocket science.

    • Strange Economics of IO and NGMEMBER

      SQM is facing loss of subscriptions from 5000 Real Estate Agents.
      Ie loss of negative gearing will reduce his business.

      See MBs other article about the power of Kleptocracy with just a lobby.
      Or see the Pharmacists this week – a quick $10k ad in the Murdoch Australian paper and govt caves 10 minutes later on cheaper scripts.

      • don’t forget the crackdown on Chemist Warehouse or whatever it’s called. Those pharmacists wield considerable power.

      • “SQM is facing loss of subscriptions from 5000 Real Estate Agents”

        Yup, I guess that would do it. In any event, what SQM thinks will make fundamental difference – you can only avoid reality for so long.

    • kiwikarynMEMBER

      Tell that to the sharemarket during the GFC. Without Govt assistance the “clearing price” might well have destroyed the entire financial system. The free market tends to over react, and destroys people’s life savings in the process. One can argue that is just the normal economic cycle playing out, and those with cash will get filthy rich when they buy at the start of the next bull market, but between now and then there will be a lot of misery.

      • Well … it’s a bit more complex than that. When I talk about a ‘free market’ I’m talking about one in which ALL aspects are genuinely ‘free’ i.e. citizens are free to choose what ‘currency’ to transact in and interest rates are not set by central bankers.

        Instead, we have a debt-based monetary system in which financial market prices are largely determined by what the money supply is doing, while the reality is that the non-permanent element of the money supply is what threatens the ‘implosion’ to which you refer. Fake money begets fake markets, not free markets.

        The free market is only a threat to standing Governments and big business most of whose competitive positions are protected by the legislation/regulation they successfully lobby for.

        The Government has their filthy prints on so many elements of our economy that there is only a semblance of a free market these days.

    • “Death threats or a genuine re-evaluation?” My response to this question is to ask another question. Did not SQM Research do its homework before, so how does a “genuine re-evaluation” come about? Did they just pull all that work HnH just quoted out of their arses, and now they’ve realised their mistake and are saying “my bad”?

      What has happen here (IMO) is what has happened for decades, a complete 180 on their previously stated position, but today it is a hell of a lot easier to recover past comments.

      Edit: Except the rebuttals of SQM will not get the same level of air time.

  2. Well the property prices on the Sunshine Coast are dropping. I saw a property up here drop from 690k to 495k now….. Some of the people are sticking to their guns and well those arent selling…… Bring it on.

    • Strange EconomicsMEMBER

      And 100K off the usual poky 2 bedroom flats of inner west Sydney and inner south east melbourne. 600k+ (ridiculous) down to 500.. Worth about 350k really on a 4% gross yield.
      And rent drops as renters have discovered that hundreds of lovely new buildings to rent
      (with structural problems but thats the owners problem) are available 2 km away.

    • I thought you live in USA!

      In the Gold Coast, there was a popular phrase about 10 years ago – “below replacement cost”.

      ie, buy this flat for $400k because building a new flat will cost more.

      • Jacob, We moved back here in Dec 2019. I litterly just got back from visiting the US and sold a rental property made a killing on it. I think we pulled out just in time over there. We are sitting tight until next year probably start really looking Feb 2020 next year.

    • My partner has an interest in a Gold Coast IP that is now valued at least $25K below puchase price. Add stamp duty, transaction costs etc. It’s been a disaster.

    • You’ll find that the coasts (Sunny and Gold) get seriously ugly during property downturns. Too many second homes on the coasts means those markets are very vulnerable.

      • Dominic, Yeah I saw that in 2007-09 when we were living in Brisbane. Bring it on…..:) We are more inland though Beerwah, Peachester, Moolooah Valley, Eudlo, Landsborough are the areas we are looking. Might consider Glass House Mountains if the price is right.

  3. REIA, if you’re watching, why aren’t you rolling with the punches, and pushing an alternative?

    Like, say, changing the depreciation schedule to 20yrs and dumping NG entirely?

  4. “There is almost truck loads of analysis and reports showing the adverse impacts of the policy on mum and dad investors, home owners, renters, the construction industry, state governments and the economy.

    Exactly. Almost.

      • What about the ALP’s own analysis(via the McKell Institute) that their NG policy will have a few basis point impact on house prices.

      • @Jason, will that few basis point impact translate to “adverse impacts [of the policy] on mum and dad investors, home owners, renters, the construction industry, state governments and the economy.” or actually be beneficial to most of these?

      • The basis points fall is the modeled outcome of the policy on housing prices. It doesn’t say anything else about the impact of the policy or on whom.

        But it does suggest that as an affordability measure it is a particularly poor one.

  5. Forrest GumpMEMBER

    As Koche said. Politicians hold 500 investment properties.

    Given the average cost of a property is say $650,000. This means politicians own at least $325,000,000 in property. (Excluding those owned by their trust funds, super funds, spouses and kids)

    Sink In The Game

  6. Wholly Sh!t I think Labour generally will be a disaster for Australia in its own right, but boy oh boy I am firing up the pop-corn maker for this forth-coming Real Estate melt-down if they win the May election ! bring on the crash and bring on this recession that we’ve been meaning to have for the past ten or so years x